Monday, December 29, 2014

Yet Another Reason Not To Get A Reverse Mortgage

A reverse mortgage may allow you and your spouse to stay in your home until both of you die.  But what happens if you are not married?

I was talking to a friend from retirement village the other day, and he related another reverse-mortgage nightmare scenario to me.

Joe and Judy are a couple in retirement village and they bought a big house there, right at the height of the housing bubble.  Problem is, they hadn't sold their previous home, first.  Saddled with the expenses of owning two homes, Joe decides the solution is to take out a reverse mortgage on his new home.  He has money in some investments, but doesn't want to tap into those.   The reverse mortgage promises to provide him with the money he needs to maintain both homes, until he can sell one.

Joe is not in good health, and had a health scare.  And the problem for Judy is that the house is in Joe's name.  You see, Joe and Judy are not married.  And if Joe dies, well, Judy is out on the street.  And the rest of his assets go to his children by his first marriage.


A reverse mortgage sounds like a solution to life's problem.   But it is just another re-fi, and serial re-fis are a bad idea all around.   When you start to think about refinancing your home - to take out equity to pay off debts - it should be a wake-up call that you are spending more than you are making.

In Joe & Judy's case this is particularly heartbreaking, as Judy is much younger than Joe, has little saved of her own money, and can expect to live decades longer than he will (as he has several illnesses, one of which will eventually kill him).

Before you take out a reverse mortgage, think about where this is going - and how the surviving spouse will live, when the other dies.

You see, even if Judy and Joe were married, or Judy's name was on the house (and reverse mortgage), since she is so much younger than Joe, she may live for many more years.   When Joe dies, she can stay in the house and continue receiving reverse mortgage payments - but her income will likely be far less, as she will collect a survivor's benefit on Joe's Social Security (if they were married) or if not, have to collect only her own (and no longer have Joe's income).   The four-bedroom home may no longer be seen as desirable.   She may want to downsize.

Problem is, much of the equity of the home has been sucked out of it by Joe's reverse mortgage - so that Joe could live large in his final years - leaving Judy to pick up the pieces.

Gee, this sounds familiar, don't it?

Oh, yea, another fun couple who did the same thing - only this time the dead husband left an "upside-down" motor home for the wife to deal with.   Men really are no damn good.

Or take another couple.  Husband and wife, living in a house that was literally falling down around them.  They had a hoarding problem - the house being full of boxes and junk, and two broken cars in the driveway (along with a defunct golf cart).   The wife is finally put in the nursing home due to dementia, and then the husband decides to clean up the house and remodel it.    That's nice.   Don't you think your wife would have enjoyed that new kitchen while she was still ambulatory?   Instead, they lived in squalor, and once the wife is in the home, he lives like a king.   I don't think he intended to be cruel to his wife as he loves her very much.   It is just the way things worked out.  And I don't get it.

But you know, living among the elderly, it is a refrain I hear a lot.   The women outlive the men, usually by a decade or more.   And when the men die, the women find out that their husbands had made a mess of things, financially.  This is not an uncommon occurance.

The problem is, as I see it, twofold.   First, men love their motorized toys, and will spend huge amounts of money on them.   This reduces the net worth of the marital estate considerably over the years - all so that one partner in the marriage can have fun with expensive toys.

Second, men are usually older in a marriage, and usually the first to lose their faculties and the first to die.   They lose their minds as they get toward the end, and often make unsound financial decisions.   Men like to think they are clever or getting ahead of the game (with all those frequent flyer miles!) but they get suckered into bad deals along the way.

Reverse mortgages can be one of those bad deals.   For the husband, it is a good deal - increased income during his last years of life are certainly enjoyable.    But once he dies, it is the poor wife who is now stuck with a huge house she no longer wants, an a huge mortgage that needs to be paid off.

Men.  No damn good!